When Should I Start Taking Social Security Benefits?

You may be thinking about taking your Social Security benefits early. After all, you have paid Social Security on your earnings for years and you deserve to have them pay you for a change. And, since you are allowed by the government to take Social Security income as early as age 62, and “Normal Retirement Age” is 67 for all Americans born in 1960 or later, giving up those benefits for 5 years seems like way too much. What you may not realize is how much that early payout may cost you.

Taking early retirement benefits from Social Security affects how much you get for the rest of your life, affects your cost of living increases for the rest of your life, and affects how much your spouse will get if he or she is drawing based on your earnings. If you are in reasonable health, and can live without taking the benefits now, you may want to wait.

The biggest and most apparent bad effect of taking Social Security before your normal retirement age is that they cut the amount that you get per month — and they cut it by a lot. If you take benefits at age 62, you will have your monthly benefit cut by 30%. What this means to you in dollars is that if you were expecting Social Security of $1500 per month, your benefit is going to get cut to $1,050. Wow!

Basically, if you take your benefit early, your Social Security is cut by 5/9% per month for 36 months, then by 5/12% per month thereafter, up to the maximum of 60 months. So even taking benefits at what you may think of as still the right age for retirement — age 65 — reduces your monthly benefit and cost of living increases by 13 1/3%.

Obviously, if your health is poor and you have reason to believe that you only have a few years left, you may want to take what you can while you can, but that decision also affects your surviving spouse. The maximum survivors benefit is limited to what you received when you were still alive. So whatever percentage cut you take will affect his or her benefit (if it is based on your earnings record) for the rest of his or her life as well. Note that if your spouse would receive a benefit based on his or her own earnings record that is greater than what they would receive based on your record, they will receive the greater amount.

If you don’t need your Social Security benefits right away, you can delay taking them. Generally, if you were born in 1960 or later, you can get up to 8% more benefit each year for each year you delay taking your Social Security. So, you would have to live for as much as 12 ½ years (with no cost of living increases) for the delay to pay off, but given that your life expectancy may be as high as 88, you would get that extra 8% on both your starting benefit and your cost of living increases for as many as 20 years or even more.

The amount that you and your survivors will receive is based on a complex interaction between your own personal health and life expectancy, your normal retirement age, when you start your benefits and when your survivors take their benefits.  You can go to the nearest Social Security office to see a government employee who will explain the choices to you, but they can sometimes be rushed.  A financial planner can help you evaluate your alternatives for a fairly small fee.

Reprint with permission IARFC Register, Vol. 14 No. 10